The U.S. is under international criticism because under its Intergovernmental Agreement (known as IGA) reciprocal exchange accords, the U.S. has already transmitted information on those who are tax residents outside the U.S. to respective national tax authorities under the IGA. The spotlight is on the U.S. because the U.S. has made it clear that it does not currently intend to adopt the CRS. The rationale behind the U.S.’s decision is that FATCA “gets it done” and fulfils the needs of the U.S. This decision leaves the U.S. as a “non-participating jurisdiction” under the CRS regulations.
Little has been written about what this really means. An initial analysis reveals that the U.S.’s non-participation means a lot because it will cause compliance and regulatory headaches for certain U.S. businesses, as the CRS took effect on January 1, 2016. In the OECD’s words, the new “standard (CRS) consists of a fully reciprocal automatic exchange system, automatic exchange involves the systematic and periodic transmission of bulk taxpayer information.”
In a nutshell, CRS has a much larger scope than FATCA and will require substantially increased reporting on a greater number of customers than FATCA. Why? Under CRS, reportable accounts include accounts held by individuals and entities, including trusts and foundations. CRS requires to “look through” passive entities to report on the individual(s) that ultimately control these entities. Unlike FATCA, CRS has no minimum threshold for individual accounts. So, they are all reportable. A pre-existing entity account becomes a reportable account when the aggregate balance or value exceeds $250,000.00. All new accounts are subject to the CRS reporting requirements. For purposes of the CRS, Financial Institutions (FI’s) include not only banks, but also other FI’s, such as brokers, certain “collective investment vehicles,” and insurance companies. Here is where the challenge begins and this is why:
CRS provides for governments to annually and automatically collect and exchange with other participating governments bulk financial account information, such as balances, interest, dividends, investments, and proceeds from sales of financial assets. It covers accounts held by individuals and entities, including businesses, trusts, and foundations. Not just banks, but broker-dealers, investment funds, and insurance companies are required to report.
CRS is a minimum standard. Each participating country enacts its own laws and issues its own rules, regulations, and guidance for implementation, potentially imposing additional requirements in the process. As a result, CRS is unlikely to be a truly common standard across all countries, therefore complicating reporting and compliance efforts.
The result of the U.S. being a non-participating jurisdiction is that all FI’s in the CRS will need to treat any U.S. Reporting FI as a Non-Financial Foreign Entity (NFFE). This means that any CRS FI holding an account for a U.S. FI (such as a trust in Wyoming, South Dakota or wherever), will need to “look through” the U.S. FI and establish, and report if needed, on its controlling person(s).
CRS requires automatic audits of clients who fail to provide the necessary documentation in a participating jurisdiction. Therefore; custodians may decide not to do business with any entity in a non-participating jurisdiction, like those located in the U.S., who are not able, or not willing to send the required information.